Income distribution: Taxes and government benefits: the effect on household income

In 1998-99, the gap in gross incomes received by the top 20% of households (by gross income) compared with the bottom 20% was reduced by one-third through the taxation and indirect government benefits attributed to households.

One consequence of governments collecting personal income taxes and providing cash benefits to individuals and families is the redistribution of disposable income between households in Australia. That is, some households pay more tax than they receive in cash benefits while others pay less tax than they receive in cash benefits. For example, older households and one-parent households are more likely to be net cash recipients from the taxation and benefits systems, while younger couple only households are likely to pay more tax than they receive in cash benefits.

Governments also collect revenues through indirect taxes. Since July 2000, the Goods and Services Tax has been the most significant indirect tax levied in Australia. Prior to this, taxes were levied on production, sales, payroll, and imports. Indirect taxes become embedded in the prices of the goods and services produced and imported, and ultimately consumed. Governments use their taxation revenues to provide benefits to society in the form of subsidised or free goods and services. Much of these goods and services provided are benefits which cannot be readily attributed to individuals, such as law and order, and defence expenditures. However, some government expenditures are more identifiable as specific household consumption of the goods and services provided, such as education and health services.

Modelling the incidence of personal taxation, indirect taxation, and cash and selected non-cash benefits provides a summary view of their effects on the net income and consumption of households. For the purposes of the analysis in this article, the impact on the private income of households of direct and indirect taxation and cash benefits is brought together with the value of free or subsidised household consumption. This is then presented as the final income of these households. It should be noted that data in this article relate to the year ended 30 June 1999, which was prior to the introduction of the Goods and Services Tax and other tax changes.

AVERAGE WEEKLY VALUE OF PRIVATE AND FINAL HOUSEHOLD INCOME - 1998-1999

Taxes, benefits and incomeThe data presented in this article are derived from the 1998-99 Household Expenditure Survey. Further details of the concepts and methods relevant to this article can be found in Government Benefits, Taxes and Household Income, Australia, 1998-99 (ABS cat. no. 6537.0). While the methods used to allocate both taxes and benefits to households are similar to those used in other studies in Australia and overseas, other approaches could have been taken which may have produced different results. The results in this article are dependent on the particular assumptions described in the above publication.

The data in this article incorporate revisions to the results included in the above publication. For more informationsee Australian Economic Indicators, April 2002, Upgrading Household Income Distribution Statistics (ABS cat. no. 1350.0).

Total taxes are the sum of direct tax (personal income tax) and indirect tax. Indirect tax comprises sales taxes, payroll taxes, excise and import duties that are paid indirectly by the household when goods and services are purchased.

Total benefits are the sum of direct and indirect benefits. Direct benefits are regular cash payments received from the government, e.g. age pensions and unemployment allowances. Indirect benefits are non-cash benefits received by households from government funded services in the areas of social security and welfare, housing, health and education. Indirect benefits were given the value equivalent to the cost to government of providing them. The value was then added to the income of the households that received the benefit.

Private income is household income from non-government sources, such as wages and salaries, interest, rent, dividends, profits, investments and superannuation. Gross income equals private income plus direct benefits. Final income equals gross income plus indirect benefits minus direct and indirect taxes.

Income quintiles are formed by ranking all households in terms of gross income and then dividing the households into five groups each containing 20% of all households. Comparisons between income quintiles over time are affected by changes to household size and composition.

AVERAGE WEEKLY VALUE OF TAXES PAID AND BENEFITS RECEIVED BY HOUSEHOLDS - 1998-99

The effect on high and low income householdsIn 1998-99, average weekly private income was $15 for households in the lowest gross household income quintile, and $1,960 for households in the highest quintile (the amount for households in the lowest quintile is affected by people reporting negative income due to business losses). When taxes were subtracted and benefits added, this difference was reduced. Final income of the lowest quintile was $286 per week and final income of the highest quintile was $1,520 per week. As a result, the difference between the final incomes of the two quintiles ($1,234) was much less than the difference between their private incomes ($1,945).

The amount of taxes paid by households increases as their income increases. In 1998-99, the 40% of households with the lowest incomes (i.e. the bottom two quintiles) paid 3% of all personal income taxes and 24% of all indirect taxes. The composition of taxes paid also changed as income increased. In 1998-99, the lowest income quintile paid 5% of their total tax in direct tax while the highest quintile paid 81%.

However, across all quintiles, the receipt of benefits did not increase as income decreased. Households in the lowest income quintile did not receive the greatest value from benefits. This was received by households in the second quintile. This is because income is not the only influence on the receipt of benefits. The size and composition of households is also influential. Households in the second quintile had a higher average number of people receiving government cash benefits. They also had a higher average number of dependants than households in the lowest quintile.

AVERAGE WEEKLY VALUE OF COMPONENTS OF FINAL HOUSEHOLD INCOME - 1998-99

Net benefits over the life-cycleThe extent to which households pay tax and benefit from government expenditure varies over the life cycle. In the early stages of the adult life cycle, when people are young and living alone, or living as a partner in a couple without children, the payment of taxes considerably outweighs benefits received. These households receive little in benefits because of the absence of children (and therefore of associated family payments and education benefits), high labour force participation, and relatively low usage of health services. In 1998–99, young lone-person households paid on average $186 per week in taxes and received $87 in benefits. Households comprising young couples without children (i.e. those with a reference person aged less than 35 years) received only marginally more in benefits ($96 per week) but paid around twice as much in taxes ($376 per week), reflecting that both partners are often employed.

In 1998-99, households comprising couples with dependants received more in direct and indirect benefits on average than young couple-only households and young lone-person households. Direct benefits were higher because couples with dependants tended to be eligible for family allowance and other benefits, such as Austudy. Indirect benefits were also higher. Couples with dependants received more in health benefits since there were more people in the household, and received greater education benefits because many contained children who were participating in school or other education. While the average level of taxes was greater than that of benefits for households containing couples with children aged less than 5 years only, for those with older children, the opposite was true. In 1998-99, couples with dependants where the eldest child was aged 15-24 years paid on average $404 per week in taxes and received $474 in benefits.

Households containing one parent with dependants receive comparatively high levels of direct and indirect benefits, including family payments and education benefits. They have relatively low incomes and spend less, so they pay less tax. In 1998-99, these households received the highest net benefits on average of all selected life-cycle groups. They paid on average $94 per week in taxes and received $494 in benefits. Their final income was two and a half times their private income, but was still lower than the final income of households containing couples with dependants.

Households where the children are no longer studying but are still living at home tend not to receive as many indirect benefits because fewer household members use education services. Levels of household income and expenditure are both high, resulting in high direct and indirect taxes for these households. In 1998-99, couples with non-dependant children only, paid on average $398 per week in taxes and received $274 in benefits. Their final weekly income was $123 less than their private income.

When one partner in a couple, or a person living alone, is aged 65 years or over, their private household income tends to be low (after retirement) so their direct taxes are low. They often receive direct government benefits, mainly the age pension. The level of indirect benefits for these households is often higher than in other households without children due mainly to greater use of health services, while indirect taxes tend to be low because expenditure is low. In 1998-99, households comprising couples where the reference person was aged 65 years or over paid on average $90 per week in taxes and received $454 in benefits. Households containing a lone person aged 65 years or over paid an average of $47 in taxes and received $285 in benefits. Their final income was three times their private income, but was still the lowest of the selected life-cycle groups.

DISTRIBUTION OF PRIVATE HOUSEHOLD INCOME(a)

DISTRIBUTION OF FINAL HOUSEHOLD INCOME(a)

(a) 1984 refers to calendar year, other periods are for the 12 months ended 30 June.

Changes in distribution of incomeComparisons of income distribution over time can provide a useful perspective on changes in the way income is distributed among households, and shed light on the compositional effects on income distribution that arise when the type or size of households change over time. In the following analysis, comparisons between income quintiles over time are affected by changes in the methodologies used, as well as by differences in, and changes over time to, household size and composition.

The spread of private household incomes across quintiles in 1998-99 was very similar to the spread in 1993-94. However, the highest income quintile received a larger share of private income in 1998-99 than in 1984 (50% compared with 47%). The share of private income received by the second and third quintiles decreased over this time.

In contrast, the distribution of final household incomes remained relatively unchanged between 1984 and 1998-99. Despite the reduction in the share of private incomes received by households in the second and third income quintiles, an increase in the share of benefits received by these groups and a reduction in their share of taxes paid means that there has been little change in their share of final income over this time. The second quintile consistently received about 14% of final income and the third quintile about 18%. Households in the lowest quintile consistently received about 8% of final income, despite a change in the demographic characteristics of households in this quintile. In 1998-99, households in the lowest quintile were on average smaller than in 1984. In particular, 65% of the households in the lowest quintile in 1998-99 were lone-person households, compared with 54% in 1984. While the share of total government benefits accruing to these lower income households decreased over the period, the level of government benefits increased sufficiently to maintain this quintile’s share of final income at 8%.

For households in the highest quintile, the increased share of private household income between 1984 and 1998-99 was partly offset by an increase in the share of taxes paid and a reduction in the share of benefits received. This group's share of final income therefore remained relatively constant over the period (between 36% and 37%).

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